International Business: Meaning And Scope

Learning value:

This chapter covers the essential aspects,

1. Definition of international business2. Emergence of developing nations in international business3. Motives of international business from companies and nations4. Fundamental differences between Domestic and International business5. Few successful organizations in Domestic & International business

International business: Meaning and Scope

In the post independence era, more than half-century Indian entrepreneurs concentrated on domestic operations and a surplus production was exported. The physical movement of goods, called export cannot represent International business. International business is defined as “any commercial transaction-taking place across the boundary lines of a sovereign entity”. It may take place either between countries or companies or both. Private companies involve themselves in such transactions for revenue, profit and prosperity. If governments are involved, they need to maintain their image, dependency and economic growth. Sometimes economic ties are strengthened through such transactions. These transactions include investments, physical movements of goods and services, transfer of technology and manufacturing. Today every company, whether small or large, single entity or partnership, joint stock or government owned, is determined to expand internationally. Earlier the slogan “export or perish” has now become “internationalize or perish”.

Interdependency is a natural phenomenon; nations, living beings and companies could not totally depend on themselves from time immemorial till date. It is the major driving force for international business. If every one has everything, there is no need to go out to trade.

International business has a wide spectrum of activities beyond mere exports. Currently Indian companies acquire and takeover companies elsewhere. They invest a huge sum to find a right location for cost-effective production base. They are on the lookout for right joint-venture partners. Hence International business operations extend their dimensions.

The future success of company will depend upon its operations in many other countries through investment, manufacturing and marketing and not only on the revenue generated indigenously. In the same way nations success will depend on the businessman operating successfully in other countries and establishing their credentials there. In the 1950’s and 60’s, companies form United States built business operations throughout the world and brought image to the nation. In 1970’s and 80’s, Japanese electronics and automobile companies made great revolution everywhere in the world.

Why should we study International business?

Three decades ago very few companies ventured in to international arena, and most of them restricted themselves to physical movement of goods and services i.e. exports and imports. Restrictions, regulations and other barriers prevented them to take risks. Today, the whole world is open. Duties, licenses, quotas and other investment limitations have gradually been eliminated. Anyone can do business in any part of the world. Risk factors are properly analyzed and evaluated and information about them is abundant. The aspiring international businessman can go anywhere and explore opportunities.

In such a situation few key factors like finance flow or investment is a great force. To manage business internationally the right human resource is necessary and to manufacture goods, right technology is a pre-requisite. There should also be sizeable market to generate revenue. To manufacture goods in any country, raw material, components, consumables and capital items are required. Easy access to all the above is as easy as domestic procurement today. Hence scope of international business is widened. Once companies from India which focused on exports, marketing and other trading functions are now becoming international business units by investing, setting up production centers, mobilizing funds and strengtheninghuman capital overseas by which they transform their entities global.

REFORM PROCESS

Almost all the countries are reforming their economy by LPG, i.e. Liberalization, Privatization and Globalization. Many South East Asian nations, China, South Korea and a few Latin American countries were quick to introduce the reform process. India too, injected new vigour in to its economy and industry by introducing an open door policy, eliminating licenses, replacing foreign restrictions by other models and in general liberalizing procedures. It is clear that through reforming process, manufacturers in India are required to increase the production capacity and divert products to various destinations. Companies with surplus money should invest in different countries with motive of getting higher returns on

COMPANYCOUNTRY OF

ORIGIN

OVERSEASOPERATION

KEY FACTORS

FINANCE

HUMAN RESOURCE

TECHNOLOGY

MATERIAL

their investment. Every business house such as Tatas, Birlas, Mittals, Mallayas have begun their aggressive operations abroad.

STRENGTH OF HUMAN RESOURCES

Countries like India have been endowed with efficient technical and non-technical human resources. Companies with their origin in India have proved themselves all over the world specially information technology, steel, healthcare, garments and jewellery.

Today international business is growing at a fast pace. Countries, which until now did not ventured in to the international arena and untapped markets have emerged as potential ground for business. Latin America, sub-Saharan Africa and the Commonwealth of Independent States (CIS) are favourite destinations of future prosperity. Trade policies announced by various governments in the world are positive, proactive and pragmatic. Autocracy, authoritarianism and despotism are disappearing in all parts of the world. International bodies, such as World Trade Organisation strongly advocate elimination of barriers.

It is mandatory for professionals to understand the whole network of political, legal, competitive and socio-cultural aspects wherever the business is setup. When E-Merck set up a business unit in India, there was a need for five hundred professionals who understood drug price control order, in-process control system, food and drug administration and legal procedures, not only in India but in all countries in South Asia, Middle East and Africa.

Hence, there will be an unprecedented demand for trained professional in the field of international business to handle business, investment, manpower, technology, services and marketing. To operate effectively, managers must understand modes, functions, means, environments, growth opportunities and risk factors. To this end they need to have access to a strong information base. To integrate all resources and produce a cost-effective product it in to revenue a strong professional force is directly involved at all stages. Thus a large force of trained manpower is required to handle future international business in all countries. Proper understanding of culture, economic indications, infrastructure, cost of operation, political scenario and working

condition will make effective manager in international business in any country.

REASONS TO ENTER INTERNATIONAL BUSINESS

All organizations, irrespective of their size, are keen to enter in to international business. Established companies are expanding their business. Many countries encourage trade, and removal of strangulating trade barriers. It motivates companies to aggressively multiply their targets. The governments of various countries are also determined to make their economy grow through international business that has therefore become a inevitable part of their economic policy. The objective behind international business can be looked at:

1. From an individual company’s angle.2. From the government angle.

From an individual company’s angle

1. Managing the product life cycle:

All companies have products, which pass through different stages of their life cycles. After the product reaches the last stage of the life cycle called the declining stage in one country, it is important for the company to identify other countries where the whole cycle process could be encashed. For example, Enfield India reached maturity and declining stage in India for the 350 cc motorcycle. The company entered Kenya, West Indies, Mauritius and other destinations where the heavy engine two-wheeler became popular. The Suzuki 800 cc vehicle reached the last stage of its life cycle in Japan and entered India in the early 1980’s, where it is still doing good business today. HP laptops are moving all the developing countries the moment they reached maturity in the U.S. market.

2. Geographic expansion as a growth strategy:

Even if companies expand their business at home, they may still look overseas for new markets and better prospects. For example, Arvind mills expanded their business by either setting up units or opening warehouses abroad. Ranbaxy’s growth is mainly attributed to geographic expansion every year to new territories. Arobindo Pharma, Cipla and Dr. Reddys follow the same.

3. The adventurous spirit of the younger generation

The younger generation of business families has considerable International exposure. They are willing to take risks and challenges And also create opportunities for their business. Laxmi Mittal has Emerged as the steel king of the world and Vijay Mallya of the UB Group took a major risk in setting up operations in South Africa. Kumar Birla expands to Australia and Europe through acquisitions.

4. Corporate ambition:

Every corporate in the country has strategic plans to multiply its sales turnover. In case some of the ventures fail, others will offset the losses because of multi-location operations. For example, Coco Cola is still to day not earning any profit in a number of countries. But this will not affect the company because more than a hundred countries are contributing to offset losses. Kelloggs cannot think of profits in India for further five years. They are ambitious to be visible and then revenue.

5. Technology advantage:

Some companies have outstanding technology through which they enjoy core competency. There is a need for such technology in all countries. Biocon, Infosys, Gharda chemicals are known for their core competency in biotechnology, IT and pesticides respectively and a huge demand exists throughout the world for their technology. Thermax, Ion Exchange, Bharat Heavy Electricals and Larsen & Toubro have marched ahead in International business.

6. Building a corporate image

Prior to profits and revenue generation, many companies first build their corporate image abroad. Once the image is built, generating revenues is a comparatively easy task. Samsung and LG built their image in India for the first three years and generation of revenue and profits has been considerable, as they have expanded to semi-urban and rural India as well. Today their market share and penetration levels have gone far ahead of other players in India.

7. Incentives and business impact

Companies, which are involved in international business, enjoy fiscal, physical and infrastructural incentives while they setup business in the host country. The Aditya Birla Group enjoyed such incentives in Thailand and Indonesia. All such incentives contribute to the company to enjoy multiple advantages like economies of scale, access to import inputs, competitive pricing and aggressive promotion.

8. Labor advantage

Many companies have a highly productive labor force. Their unique skills may not be available throughout the world. Manufacturing units in India have consistently performed well, whether in a diamond industry, handicraft, woodwork or leather. Companies nurture the skills of the artisans and win world markets. Knitwear, handlooms, embroidery, metal ware, carpet weaving, cashew processing and seafood call for cost-effective labor force. India is endowed with such skills.

9. New business opportunities

Many companies have entered in to business abroad, seeing unlimited opportunities. National foreign trade policy emphasizes focus markets. Enormous amount of growth potential is untapped in Latin America, Sub-Saharan Africa, CIS countries and China.

10.Emergence of SEZ’S, EOU’S, AEZ

Current approvals of Special economic zones, Agrizones and Technology parks by Ministry of Commerce & Industry give new dimensions to international business. The companies setting up units in SEZ’s enjoy innumerable benefits and competitiveness.

From a Government Angle

1. Earning valuable foreign exchange

Foreign exchange earning is necessary to balance the payments for imports. India imports crude oil, defense equipments, essential raw materials and medical equipments for which the payments have to be made in foreign exchange. If the exports are high and imports are low it indicates a surplus balance of payment. On the other hand if imports are high and exports are low it indicates an adverse balance of payment, which all economies would want to avoid. A vast majority of the nations in the world are facing adverse balance of payment.

2. Interdependency of nations

From time immemorial, nations have depended on each other. Even during the era of Indus valley civilization, Egypt and the Indus Valley depended on each other for various items. Today, India depends on the Gulf regions for crude oil and in turn the Gulf region depends on India for tea, rice etc. Developed countries depend on developing countries for primary goods, whereas developing countries depend on developed countries for value added finished products. No single country is endowed with all the resources to survive on their own.

3. Trade theories and their impact

The theories of absolute advantage, comparative advantage and competitive advantage, which have been propounded by classical economists, indicate that a few nations have certain advantages of resources. The resources may be in the form of labour or infrastructure or technology or even a proactive policy of the

government. Such theories are remaining foundations till today, for international business practices with few changes and trends.

4. Diplomatic relations

Diplomacy and trade always go hand in hand. Many sovereign nations send their diplomatic representatives to other countries with a motive of promoting trade besides maintaining cordial relations. Indian diplomats in Latin America have done a remarkable job of promoting India’s business in the 1990’s. Indian embassies and high commissions in all the countries around the world play a catalytic role of promoting trade and investment.

5. Core competency of nations

Many countries are endowed with resources, which are produced at an optimum level. Such countries can compete well anywhere in the world. Rubber products from Malaysia, knitwear from India, rice from Thailand and wool from Australia are a few illustrations. Competing with a focused competency in any major resource or technology gives core competency status. India’s core competency in IT is known throughout the world.

6. Investment for infrastructure

Over the years all countries have invested huge amounts of money on infrastructure by building airports, seaports, economic zones and inland container terminals. If the trade activities do not increase, the country cannot recover the amounts invested. Hence, the government fixes targets for every infrastructure unit and time frame to achieve it. Economies like Mauritius, Hong Kong, Singapore, Malta and Cyprus invest in trade related infrastructure in order to elevate themselves to be foreign trade oriented economies. Infrastructure and international business are the two eyes of a growing economy.

7. National image

A new era has emerged from conquering countries by sword to winning it by trade. A businessman gives priority to the image of the country he belongs to. We come across products with labels such as “made in China” and “Japan” & “made in India”. Businessmen from India, China and Japan bring credentials to their country. When L.N.Mittal operates in Indonesia or Kazakhstan or Trinidad he is perceived by the people as Indian. The stigma cannot be detached.

8. Foreign trade policy and targets

All developing countries announce their trade policies. A clear road map is drafted and given to promotional bodies so that timely implementation is possible. Every trade policy in India, in the past had its agenda and action plans right from import control order in 1947. All the trade policies had three fold objectives in their agenda- production promotion and competitiveness.

9. National targets

By the year 2010, India aims to have a 2% share of the global market from the current level of 1.5 %. By the year 2009-10, our trade status was expected to cross $ 500 billion. The global melt down and its impact on low consumption around the world has limited the target unachievable for India.

10. WTO and international agencies

The apex body of world trade, the WTO, a free, transparent and regulatory body upholds provisions related to the elimination of tariffs and non-tariff barriers. The International Bank for Reconstruction and Development (IBRD), popularly called the World Bank extends financial assistance on a soft loan basis in order to assist developing countries in their infrastructure and industrial development. The International Monetary Fund (IMF) maintains currency stability in various countries through regulatory mechanisms. Many more organizations like International Maritime Organization, International Standard Organization, International

Telecommunication Union, International Civil Aviation Organization are major catalysts to promote trade between nations. Over the past few years their role in promotion of trade, especially amongst developing economies is unprecedented.

Fundamental differences between DOMESTIC BUSINESS OPERATIONS AND INTERNATIONAL BUSINESS

OPERATIONS

Many well-known business units are highly successful in their home countries. However, they are not able to face the challenges abroad. On the other hand there are organizations that do very well in international business but they lose out in local arena. There are a number of organizations that do business, both domestic and international, successfully, by properly allocating right resources in right countries. These organizations are quick to see the advantages and disadvantages involved in both operations. If business is slow in the home country, they concentrate more on international business, and if risk is high in international business they focus their attention on the domestic front. Understanding differences and deciding policies and strategies enable organizations to succeed or fail.

There are certain similarities between domestic and international business in terms of broad objectives and goals of the company, namely:

1. Generating revenue- either by creating opportunities or by optimizing strengths

2. Corporate image building3. Customer satisfaction and building loyalty as patronage buyers4. Carrying out their operations respecting and adhering to local

regulations5. Generation of employment opportunities6. Both are subject to a set code of conduct and ethics that includes

corporate governance.

7. Mass production through cost reduction and achieving economies of scale

8. Building a strong network in order to make product and services available in any part of the nation or world

9. Adapting new standards and change in style and function.

At the same time, there are major macro level differences. These are analyzed below, under various parameters.

DOMESTIC BUSINESS VERSUS INTERNATIONAL BUSINESS

DimensionDomestic Business

OperationsInternational Business

Operations

1.EnvironmentThe economic, political, legal, socio-cultural, competitive and technology environments are known

The environment is not fully known. Innumerable hidden factors which may emerge any time to pose as problems. They will lead to pitfalls.

2. Plan and strategyCan be worked out for short terms and carried forward to long term

Only long term planning and strategy will work. Strategic inputs are required in multiples.

3. Competitive forces and their

intensity

The maximum domestic competitive forces operate and one can understand their movements as they are visible

International competitive forces play a vital role and its difficult to understand their motive and movement

4. Currencies and their movements

Local currency is used for transactions. Costing, pricing, revenue and margins are computed in a single currency. Volatility may have a minimum impact in business in short term. One can overcome easily.

Transactions are carried out in various currencies. Fluctuations in cross currency movement and associated risks are common. Currency fluctuation influences pricing and costing and investment decisions.

5. Business risks

Comparatively one can predict future risks and shocks and they will not have a major impact on the businesses with strong background.

Very difficult to predict and risks may crop up at any time, due to the political situation, the society itself and several unknown factors.

6. Research

It is reasonable and easy to conduct business research, demand analysis and customer surveys. It is also reliable.

Very expensive and difficult to conduct. Reliability criteria depends on individual countries and there is no uniformity in the output and findings.

7. Human resources Due to past laurels and established systems, companies can succeed even if the human resources have minimum skills and knowledge. Team commitments is evaluated and

Multilingual, multi-strategic and multi-cultural human resources and they should be able to withstand large risks. Every individual is profit center, hence, accountable.

appraised

8. Organizational vision and objective

Narrowed down to work in a single country with a steady growth objective. Each one will understand the vision and objective easily.

Broadened to cover many countries and geographic and cultural diversity may influence the vision and objective.

9. Product and usage

Adapted to the local environment, as per the requirements of the domestic customers affordability, beliefs, values, cultural elements and buying behavior.

Varies from country to country subject to regulations. This is especially true for consumer & medicinal items. Standardization, adaptability, usage pattern & warranties are parts of product

10. Legal aspects

Only local regulations are fully applicable to conduct business. There is minimum adherence to international regulations related to IPR.

International regulations and host country regulations are applicable. Advanced countries impose strict regulations compared to LDCs. Strict adherence to contractual obligations is common.

11. Investment and Sourcing

Depending on the size of the business one can start with a minimum investment. Involvement of regulatory bodies is minimal. Individual ability and repayment terms determine the funds.

All overseas operations except exports, call for huge investments to set up and expand the business in many countries. Special regulatory bodies are involved in the process since foreign currency is transacted.

12. Pricing strategyA majority of companies use cost plus margin pricing or competitive pricing.

Companies use marginal cost pricing or transfer pricing or competitive pricing to succeed.

13. Distribution channels

The business house can use its discretion to select any channel to reach the customer. No restriction exists here.

Government or market practice governs the distribution channel. Cash and carry, shopping malls and mail order services are becoming popular in international business.

14. Promotion

Advertising, personal selling and other promotional methods are not restricted through strict legal framework if they are not socially objectionable.

Different countries have different restrictions. For example, advertisements for liquor and cigarettes are not permitted in some countries and campaigns using female models are banned in others.

15. LogisticsDomestic players are involved in all the activities. The cost of logistics is very high locally.

International players with advanced technology and systems are involved. Proportionately, the cost is low for physical movements.

Some business groups like Adanis started only overseas operations without any linkage with domestic operation right from the beginning. Tata group established a good name at home country and gradually

moved to other countries. For companies in IT, such as Wipro or Infosys, the major focus is on overseas operations. All the companies cited as examples above are successful in their own right, but the strategies and operation systems differ from country to country.

Organizations like RELIANCE INDUSTRIES have inherent strength in indigenous business such as completing the project prior to stipulated time. This experience enables the company to grab any business opportunity in petrochemicals around the world and build reputation. Gammon India, IRCON (Indian Railway Construction), Larsen & Toubro (L&T) and Sapoorji Pallonji are successful due to their meticulous way of understanding both operations.